This week could just be the week that lifts the markets out of their summer lull because its
probably the most data laden/central decision week for some considerable time (see the
schedule below for more detail). I will look at the main events due out shortly after I briefly
set the scene, with particular emphasis on the pound and the dollar this morning.
I said last week that the pound was bracing itself for more negative news and Friday’s close
against the dollar, below 1.24 is testament to that. Having said that, it is also clear that just
one seriously conciliatory comment from Brussels could so easily change the dynamics as
well. However, and as I noted, I don’t think we are anywhere near close enough to the
endgame for any of their rhetoric to shift yet- consequently the pound remains under
pressure. Comments over the weekend from Michael Gove haven’t done it any favours
either.
From a purely technical perspective, I cannot see much in terms of support on the downside
for the GBPUSD right now except clear space and with GBPEUR back below 1.1100 this
morning, that’s only adding to the pressure that’s continuing to come from GBP sellers
there still looking to hedge the worst case scenario.
The Q2 US GDP, consumption and prices data on Friday all beat the forecasts with growth
now estimated to be running at 2.1% over the period, where an increase of 1.8% had been
widely anticipated. Perhaps more importantly the Q2 estimate on prices paid, which came
in at +2.4% instead of previously revised estimate of 1.1% was also well above the 2%
consensus. Personal consumption over the same period was well above expectations too.
However, and perhaps because this data is latent, the markets are still expecting the Fed to
cut rates this week owing to a degree of evidence that Q3 is looking somewhat weaker.
Over and above that the Fed themselves have made it clear that they think the pace of the
economy is now slowing and to a large degree they have now pushed themselves into a
corner on what action they have to take this week. I have already argued the case for why I
think there is no need for them to act this week, so I won’t repeat those thoughts again
here.
What is clear though, is that the dollar will surely charge higher again if do they pass on
lowering the Fed Funds rate on Wednesday evening and may also react well to any
indication that this fed cut is “one and done”. Perhaps therein lies one particular currency
conundrum for the FOMC. Trump and his politicising of monetary policy is the other they
will have to continue to deal with it seems. Over and above that, what is interesting to me is
the fact that the dollar has rebounded over the past month, and lifting ahead of what is an
expected rate cut. A few people I have spoken too are slightly perplexed by that, especially
those that were positioned in anticipation of just the opposite.
Last week, following the ECB decision and Draghi’s outlook for the European economy, the
EURUSD tried to fall even further, but stopped its descent at 1.1100 and there were some
serious buyers at that level I am told. However, it remains to be seen if they will come to the
Euro’s rescue again this week. Beyond that the USD index is above 98 again as I write this
morning, but further upside is still being held back by that 98.35-40 level I mentioned last
week. Moreover, and given where the equity markets are right now, I don’t think the likes of
the Dow Jones and the S+P will react well if the Fed doesn’t ease this week.
The other asset that surely will not like inaction from the Fed is gold. The market is clearly
long on this one now and almost certainly wouldn’t react well if the Fed does pass on
lowering rates. Conversely, further upside will be seen if the Fed does move and also throws
in the prospect of more of the same to come. Regardless of that, I still like gold priced in
other currencies, especially GBP.
However, beyond whatever outcome we get from the US central bank midweek, there’s a
number of other important releases due out that could shape how and where the markets
end up come the close this Friday. There’s the Bank of Japan policy decision sometime in the wee hours tomorrow and important Chinese manufacturing PMI numbers and Eurozone
inflation and growth data too. Following the Fed, on Thursday there’s the Bank of England
policy decision as well. Then to cap it all on Friday; we’ve got more important US data with
the latest US monthly employment report.
If Her Majesty did say what she reportedly said to the new Prime Minister last week, then I
can’t imagine how she might fail to say something similar to the existing BOE governor (or
the new one whenever he/she arrives) if given the opportunity. I certainly wouldn’t want
that job right now and whilst the Old Lady might want to threaten the use monetary policy
to protect the currency, I cannot see that it would instil anything other than a very short
lived reaction in the pound were it to be mentioned. Hence Carney and co are on a very
sticky wicket (just like the Australians later this week too I hope!) and I cannot see what on
earth they might say, let alone do, to change that this Thursday.
So, with that in mind I will be back with more after the Fed on Wednesday and ahead of the
BOE Thursday lunchtime- duly armed with the benefit of some hindsight I hope, on many of
those important releases that will have hit the screens by then.
Important Economic Releases Due This Week
30/07- 3.30am Bank of Japan Monetary Policy Decision
(No Changes expected)
30/07- 1.00pm German July CPI (YOY) Inflation Report
30/07- 1.30pm US June (YOY) PCE –Personal Consumption Expenditure
30/07- 3.00pm Pan US Consumer Confidence Index
31/07- 2.00am China July Manufacturing PMI
31/07- 2.30am Australian Q2 CPI Inflation Report
31/07-10.00am Eurozone Q2 GDP Revision
31/07-10.00am Eurozone July CPI Estimate
31/07-1.15pm US July ADP Private Payroll Report
31/07-1.30pm Canadian May GDP Estimate
31/07-2.45pm US Chicago PMI
31/07-7.00pm US FOMC Monetary Policy Decision
(Consensus-Fed Funds rate expected to lowered by 0.25%)
31/07-7.30pm Fed Chair Powell Post FOMC Decision Press Conference
01/08- 2.45am China Caixin July PMI
01/08- 12.00pm Bank of England Monetary Policy Decision
(Consensus- No changes expected)
01/08-12.30pm BOE Post Policy Decision Press Conference
01/08- 3.00pm US July ISM Manufacturing Index
02/08- 1.30pm US July Unemployment Report and Non Farm Payrolls